But first, a brief plug for my step-daughter’s new fitness invention called the Da Vinci BodyBoard – it gives you a full body workout in only 20 minutes a day right in your home. She has launched a KickStarter campaign to get financing and offer it to the world – check it out: **https://www.kickstarter.com/projects/412276080/da-vinci-bodyboard**

Terry

**A Little About Vertical Spreads**

Vertical spreads are known as directional spreads. When you place such a spread, you are betting that the stock will move in a particular direction, either up or down. If you are right, you can make a nice gain. Even better, you can usually create a vertical spread that also makes money if the stock doesn’t move in the direction you hoped, but stays absolutely flat instead.

If you have a strong feeling that a particular stock will move higher in the near future, you might be inclined to either buy the stock or buy a call on it. Both of these choices have disadvantages. Buying the stock ties up a great deal of money, and even if you are right and the stock moves higher, your return on investment is likely to be quite small.

Buying calls gives you great leverage and a much higher return on investment if you are indeed right and the stock moves higher. But much of the cost of a call is premium (the extra amount you pay out so that you don’t have to put up so much cash compared to buying the stock). The stock needs to go up a certain amount just to cover the premium, and you don’t start making money until that premium is covered. If the stock doesn’t go up (and no matter how great you are at picking winners, you will probably be disappointed many times), you could lose some or all of your investment. Bottom line, buying calls is a losing proposition much of the time – you have to be really lucky to come out a winner.

Buying a vertical spread is a safer alternative than either buying stock or calls. You give up some of the extraordinary gains for a great likelihood of making a more moderate gain, and if you play your cards right, you can also make a gain if the stock stays flat.

Let’s look at an example. Last week, my favorite underlying, SVXY, had been beaten down because VIX had shot up over 25. I felt very strongly that the market fears would eventually subside, VIX would fall back to the 15 level, and SVXY (which moves in the opposite direction of VIX) would move higher.

Late last week, when SVXY was trading right at $60, I bought November 55 calls and sold November 60 calls as a vertical spread. It cost me $3 ($300 per contract). When these calls expire in about a month, if the stock is any higher than $60, my spread will be worth exactly $5, and I will make about 60% on my investment. The interesting thing is that it doesn’t have to move any higher than was at the time for me to make that kind of a gain.

In reality, while I did make this vertical spread, I didn’t use calls. Instead, I sold a vertical spread using puts, buying November 60 puts and selling November 55 puts. I collected $2, an amount which is the exact same risk that I would have taken if I had bought the vertical spread with calls. The broker will charge a maintenance fee of $5 ($500) on each spread, but since I collected $200 at the outset, my risk, and the amount I had to put up, is only $300.

The risks and rewards are identical if you buy a vertical with calls or sell a vertical with puts (assuming the strike prices are the same), but there is a neat thing about using puts if you believe the stock is headed higher. In this case, if the stock ends up at the November expiration at any price higher than $60, both the long and short puts will expire worthless (and I get to keep the $200 I got at the beginning). There is no exit trade to make, and best of all, no commissions to pay. For this reason, I almost always use puts when I buy a vertical spread betting on a higher stock price rather than calls (the only exceptions come when the spread can be bought for a lower price using calls, something which occurs on occasion).

Update on the ongoing SVXY put demonstration portfolio. (We own one Mar-15 65 put, and each week, we roll over a short put to the next weekly which is about $1 in the money (i.e., at a strike which is $1 higher than the stock price).

This week, SVXY moved sharply higher, from about $57 to about $62. Today I bought back the out-of-the-money Oct4-14 59 put for a few cents and sold an Oct5-14 64 put (about $2 in the money) for a credit of $3.65 ($365) on the diagonal spread. The account value is at $1290, just a little higher than $1234 where we started out (we would have done much better if the stock had moved up by only $2 instead of $5).

I will continue trading this account and let you know from time to time how close I am achieving my goal of 3% a week, although I will not report every trade I make each week. I will follow the guidelines for rolling over as outlined above, so you should be able to do it on your own if you wished. This week I sold the next weekly put at a strike which was $2 in the money because I think the stock is headed higher because VIX is still at an elevated level compared to where it has been for the past year or so.

]]>That will be our subject today.

Terry

**Knowing When to Bite the Bullet**

Kenny Rogers said it well – “You’ve got to know when to walk away and know when to run.” We set up demonstration portfolio to trade diagonal spreads on an ETP called SVXY. We were betting that the stock would go up. In each of the last two years, SVXY had doubled in value. Its inverse, VXX, had fallen from a split-adjusted $3000+ to under $30 over the past 5 years, making it just about the biggest dog on the entire stock exchange (selling it short would have made anyone a bundle over that time period). We felt comfortable being long (i.e., the equivalent of owning stock) in something that would do just the opposite of VXX.

In our demonstration portfolio, we decided to trade puts rather than calls because there was a lot more time premium in the weekly puts that we planned to sell to someone else than there was in the calls. Each Friday, we would buy back the expiring put and replace it by selling another put with a week of remaining life. This strategy enabled us to be short put options that had extremely high decay.

The biggest challenge was to decide which strikes to sell new puts at. We selected a strike that was about $1 in-the-money (i.e., about a dollar higher than the stock price), or if the put we were buying back was well into the money so that the trade could not be made at a credit, we would select the highest strike we could take that could yield us a credit on the spread. This meant that when the stock tumbled, the best we could do would be to sell a calendar spread at a very small credit.

In a six-week period, the stock managed to fall by over 30%. Not such good news when we were betting that it would go up. The biggest problem with a drop of this magnitude was that our short put was so far in the money that we risked an execution. This would mean that the stock would be put to us (i.e., we would be forced to buy it at the strike price). With that risk hanging over our head, the time has come to recognize our loss.

Admitting that you were wrong, at least for a certain time period, and closing out your trade, is sometimes the best thing you could do. Many people hang on to their losing investments and sell the winners (usually for a smaller profit than they could have made by hanging on). In the long run, this strategy leaves you with a portfolio of losing stocks that you are hoping will go higher (and probably never will). Better to sell your losers and move on to something more promising.

Today we placed the following trade which closed out our spread:

Buy to Close 1 SVXY Oct4-14 80.5 put (SVXY141024P80.5)

Sell to Close 1 SVXY Jan-15 90 put (SVXY150117P90) for a credit of $9.71 (selling a diagonal)

When the trade was executed at this price, we were left with $1,234 in the account after paying commissions. Since we started with $1500, we were faced with a loss of $266, or a little less than 18%. This was over a period in which the stock we were betting on lost over 30%. This is another example of how options can protect you better than merely buying stock.

We expected to make 150% a year on this portfolio, many times greater than the 18% we lost in the couple of months we operated it. If the stock had remained flat or moved higher as we expected, we could have expected to gain the 3% a week we were hoping for.

Today, in the special account I set up this portfolio with $1500 (and now is down to $1234), I am trying again, this time at lower strike prices which are more appropriate to the current level of the stock.

This was the trade I executed today when the stock was trading about $57:

Buy To Open 1 SVXY Mar-15 65 put (SVXY150320P65)

Sell To Open 1 SVXY Oct4-14 59 put (SVXY141025P59) for a debit of $12.07 (buying a diagonal)

I will continue trading this account and let you know from time to time how close I am achieving my goal of 3% a week, although I will not report every trade I make each week. I will follow the guidelines for rolling over as outlined above, so you should be able to do it on your own if you wished.

]]>I hope you find this ongoing demonstration of a simple options strategy designed to earn 3% a week to be a simple way to learn a whole lot about trading options.

Terry

**Handling an Adverse Price Change**

There wasn’t much we could do today. The short 80.5 SVXY put that we had sold was expiring about $15 in the money, a situation that makes it quite difficult to roll it over to next week as a calendar and still enjoy a credit on the trade. Instead, we chose to go out two weeks and sell an Oct4-14 80.5. This is the trade we executed:

Buy to Close 1 SVXY Oct2-14 80.5 put (SVXY141010P80.5)

Sell to Open 1 SVXY Oct4-14 80.5 put (SVXY141024P80.5) for a credit of $.20 (selling a calendar)

Hot tip of the week. With SVXY trading below $66 and VIX over 20, buying any call on SVXY is probably an excellent speculative purchase (go out a couple of months to give the stock some time to recover, as it surely will). As usual, only invest money in options that you can truly afford to lose. I am buying Dec-14 66 calls, paying $8.50 ($850) per contract with an idea to sell shorter-term calls against them at a later time once the stock has recovered some.

]]>I hope you find this ongoing demonstration of a simple options strategy designed to earn 3% a week to be a simple way to learn a whole lot about trading options.

Terry

**How to Avoid an Option Assignment**

Owning options is a little more complicated than owning stock. When an expiration date of options you have sold to someone else approaches, you need to compare the stock price to the strike price of the option you sold. If that option is in the money (i.e., if it is put, the stock is trading at a lower price than the strike price, and if it is a call, the stock is trading at a higher price than the strike price), in order to avoid an exercise, you will need to buy back that option. Usually, you make that trade as part of a spread order when you are selling another option which has a longer life span.

If the new option you are selling is at the same strike price as the option you are buying back, it is called a calendar spread (also called a time spread), and if the strike prices are different, it is called a diagonal spread.

Usually, the owner of any expiring put or call is better off selling their option in the market rather than exercising the option. The reason is that there is almost always some remaining premium over and above the intrinsic value of the option, and you can almost always do better selling the option rather than exercising your option. Sometimes, however, on the day or so before an option expires, when the time premium becomes very small (especially for in-the-money options), the bid price may not be great enough for the owner to sell the option on the market and still get the intrinsic value that he could get through exercising.

To avoid that from happening to you when you are short the option, all you need to do is buy it back before it expires, and no harm will be done. You won’t lose much money even if an exercise takes place, but sometimes commissions are a little greater when there is an exercise. Not much to worry about, however.

SVXY fell to the $74 level this week after trading about $78 last week. In our actual demonstration portfolio we had sold an Oct1-14 81 put (using our Jan-15 90 put as security). When you are short an option (either a put or a call) and it becomes several dollars in the money at a time when expiration is approaching, there is a good chance that it might be exercised. Although having a short option exercised is sort of a pain in the neck, it usually doesn’t have much of a financial impact on the bottom line. But it is nice to avoid if possible.

We decided to roll over the 81 put that expires tomorrow to next week’s option series. Our goal is to always collect a little cash when we roll over, and that meant this week we could only roll to the 80.5 strike and do the trade at a net credit. Here is the trade we made today:

Buy To Close 1 SVXY Oct1-14 81 put (SVXY141003P81)

Sell To Open 1 SVXY Oct2-14 80.5 put (SVXY141010P80.5) for a credit of $.20 (selling a diagonal)

Our account value is now $1620 from our starting value of $1500 six weeks ago, and we have $248 in cash as well as the Jan-15 90 put which is trading about $20 ($2000). We have not quite made 3% a week so far, but we have betting that SVXY will move higher as it does most of the time, but it has fallen from $86 when we started this portfolio to $74 where it is today. One of the best things about option trading is that you can still make gains when your outlook on the underlying stock is not correct. It is harder to make gains when you guess wrong on the underlying’s direction, but it is possible as our experiment so far has demonstrated.

]]>

Every Friday, we will make a trade in this portfolio and tell you about it here. Our goal is to earn an average gain of 3% a week in this portfolio after commissions.

I hope you find this ongoing demonstration to be a simple way to learn a whole lot about trading options.

Terry

How to Handle an Option Assignment

Yesterday SVXY fell over $5 a share as the market tanked and options volatility (VIX) soared. Unfortunately, this is exactly what happens every once in a while. It is the one thing that we can’t handle because we are betting that SVXY will move higher in most weeks (as it has about 75% of the time in the past).

We had sold a Sep4-14 90 put on SVXY (which expires today). We sold it at a time when SVXY was trading about $89. Yesterday it closed at $77.25, or almost $9 lower than it was last week. Our short put got so far in the money (i.e., the stock price was much lower than the strike price of the put we had sold) that there was essentially no time premium remaining in this option. Usually, the owner of any expiring put or call is better off selling their option in the market rather than exercising the option. The reason is that there is almost always some remaining premium over and above the intrinsic value of the option, and you can almost always do better selling the option rather than exercising your option.

With the short option about $13 in the money, the owner of that option discovered that he couldn’t sell his option for more than its intrinsic value, so he exercised it. He “put” the stock to us, forcing us to pay $90 for 100 shares at a time when the stock was trading for about $77. When the market opened this morning we had 100 shares of SVXY in our account and no short put.

About an hour into the trading day, we placed an order to sell the shares, collecting $78.34. The stock had rallied just over a dollar since yesterday’s close. We then sold a put at the 81 strike price that will expire next Friday. Here is the order we placed:

Sell To Open 1 SVXY Oct1-14 81 put (SVXY141003P81) for a limit of $4.10. The order was executed at $4.11.

We usually try to sell a weekly put at a strike price which is about $1 out of the money (i.e., if the stock is trading at $78 we would like to sell a put at the 79 strike price). We selected a strike which was $2 higher than that this week because we believe there is a good chance that SVXY will move higher than usual next week. VIX is above 15, and for the past several months, it has averaged between 11 and 13. If it falls back to this range, SVXY is bound to move quite a bit higher.

We were short SVXY puts in one of our Terry’s Tips portfolios yesterday, and we bought them back and sold new puts for next week because the stock had tanked so much and we wanted to avoid an assignment. We didn’t do it in this demonstration portfolio because I have told everyone that we would only be making trades on Fridays.

But the message here is that even when an assignment takes place, it is no big deal to trade out of it. If you were short a put and it was exercised like we experienced this week, you just sell the stock and sell a new put. If you were short a call, you would just buy back your short stock and sell a new call. It’s that simple.

]]>Our goal is to earn an average gain of 3% a week in this portfolio after commissions. So far, we are well ahead of this goal.

I hope you find this ongoing demonstration to be a simple way to learn a whole lot about trading options. We will also discuss another Greek measure today – gamma.

Terry

**Ongoing SVXY Spread Strategy – Week 6**

Near the open today, SVXY was trading about $89.00. We want to sell a put that is about $1 in the money (i.e., at a strike one dollar higher than the current stock price). Our maximum gain each week will come if we are right, and the stock ends the week very close to the strike of our short put.

Here is the trade we placed today:

Buy to Close 1 SVXY Sep-14 86.5 put (SVXY140920P86.5)

Sell to Open 1 SVXY) Sep4-14 90 put (SVXY140926P90 for a credit limit of $2.70 (selling a diagonal)

Each week, we try to sell a weekly put which is at a strike about $1 in the money (i.e., the strike price is about a dollar higher than the stock price) as long as selling a diagonal (or calendar) spread can be done for a credit.

When we entered this order, the natural price (buying at the ask price and selling at the bid price) was $2.50 and the mid-point price was $2.75. We placed a limit order at $2.70, a number which was $.05 below the mid-point price. (It executed at $2.70).

If it hadn’t executed after half an hour, we would have reduced the credit amount by $.10 (and continue doing this each half hour until we got an execution).

Each week, we will make a trade that puts cash in our account (in other words, each trade will be for a credit). Our goal is to accumulate enough cash in the portfolio between now and January 17, 2015 when our long put expires so that we have much more than the $1500 we started with. Our Jan-15 may still have some remaining value as well.

This is the 6th week of carrying out our little options portfolio using SVXY as the underlying. SVXY is constructed to move up or down in the opposite directions as changes in volatility of stock option prices (using VIX, the measure of option volatility for the S&P 500 tracking stock, SPY). SVXY is a derivative of a derivative of a derivative, so it is really, really complex. Right now, option prices are trading at historic lows, and lots of people believe that they will move higher. If they are right, SVXY will fall in value, but if option prices (i.e., volatility) don’t rise, SVXY will increase in value. In our demonstration portfolio, we are assuming that option prices will not rise dramatically and that SVXY will move higher, on average, about a dollar a week.

In this simple portfolio, we own an SVXY Jan-15 90 put. We will use this as collateral for selling a put each week in the weekly series that expires a week later than the current short put that we sold a week ago. Today’s value of our long put is about $14 ($1200) and decay of this put (theta) is $4 (this means that if SVXY remains unchanged, the put will fall in value by $4 each day). The decay of our short put is $13 (and will increase every day until next Friday). This means that all other things being equal, we should gain $9 in portfolio value every day at the beginning of the week and about double that amount later in the week.

Last week we spoke a little about delta. As you may recall, delta is the equivalent number of shares your option represents. If an option has a delta of 70, it should gain $70 in value if the stock goes up by one dollar. Today we will briefly introduce another options “Greek” called gamma. Gamma is simply the amount that delta will change if the underlying stock goes up by one dollar.

If your option has a delta of 70 and a gamma of 5, if the underlying stock goes up by a dollar, your option would then have a delta of 75. Gamma becomes more important for out-of-the-money options because delta tends to increase or decrease at faster rates when the stock moves in the direction of an out-of-the-money option.

To repeat what we covered last week, since we are dealing in puts rather than calls, the delta calculation is a little complicated. I hope you won’t give up. Delta for our Jan-15 90 put is minus 50. This means that if the stock goes up a dollar, our long put option will lose about $.50 ($50) in value. The weekly option that we have sold to someone else has a delta value of about 75 (since we sold it, it is a positive number). If the stock goes up by a dollar, this option will go down by about $.75 ($75) which will be a gain for us because we sold that to someone else.

Our net delta value in the portfolio is +25. If the stock goes up by a dollar, the portfolio should go up about $25 in value because of delta. (Unfortunately, this gets more confusing when you understand that delta values will be quite different once the stock has moved in either direction, but we will discuss that issue later).

If the stock behaves as we hope, and it goes up by about a dollar in a week, we will gain about $25 from the positive delta value, and about $100 from net theta (the difference between the slower-decaying option we own and the faster-decaying weekly option that we have sold to someone else.

Our goal is to generate some cash in our portfolio each week. This should be possible as long as the stock remains below $90. We will discuss what we need to do later if the stock moves higher than $90.

To update our progress to date, the balance in our account is now $1870 which shows a $370 gain over the 5 weeks we have held the positions. This is well more than the $45 average weekly gain we are shooting for to make our goal of 3% a week. We now have $1009 in cash in the portfolio.

]]>Our goal is to earn an average gain of 3% a week in this portfolio after commissions. So far, we are well ahead of this goal.

I hope you find this ongoing demonstration to be a simple way to learn a whole lot about trading options. We will also discuss some other options concepts today,

Terry

**Ongoing SVXY Spread Strategy – Week 5**

Near the open today, SVXY was trading about $86. We want to sell a put that is about $1 in the money (i.e., at a strike one dollar higher than the current stock price). Our maximum gain each week will come if we are right, and the stock ends the week very close to the strike of our short put.

Here is the trade we placed today:

Buy to Close 1 SVXY Sep2-14 86.5 put (SVXY140912P86.5)

Sell to Open 1 SVXY Sep-14 86.5 put (SVXY140920P86.5) for a credit limit of $1.20 (selling a calendar)

Each week, we try to sell a weekly put which is at a strike about $1 in the money (i.e., the strike price is about a dollar higher than the stock price) as long as selling a diagonal (or calendar) spread can be done for a credit.

When we entered this order, the natural price (buying at the ask price and selling at the bid price) was $.85 and the mid-point price was $1.25. We placed a limit order at $1.20, a number which was $.05 below the mid-point price. (It executed at $1.20).

If it hadn’t executed after half an hour, we would have reduced the credit amount by $.10 (and continue doing this each half hour until we got an execution).

Each week, we will make a trade that puts cash in our account (in other words, each trade will be for a credit). Our goal is to accumulate enough cash in the portfolio between now and January 17, 2015 when our long put expires so that we have much more than the $1500 we started with. Our Jan-15 may still have some remaining value as well.

This is the 5th week of carrying out our little options portfolio using SVXY as the underlying. SVXY is constructed to move up or down in the opposite directions as changes in volatility of stock option prices (using VIX, the measure of option volatility for the S&P 500 tracking stock, SPY). SVXY is a derivative of a derivative of a derivative, so it is really, really complex. Right now, option prices are trading at historic lows, and lots of people believe that they will move higher. If they are right, SVXY will fall in value, but if option prices (i.e., volatility) don’t rise, SVXY will increase in value. In our demonstration portfolio, we are assuming that option prices will not rise dramatically and that SVXY will move higher, on average, about a dollar a week.

In this simple portfolio, we own an SVXY Jan-15 90 put. We will use this as collateral for selling a put each week in the weekly series that expires a week later than the current short put that we sold a week ago. Today’s value of our long put is about $14 ($1400) and decay of this put (theta) is $4 (this means that if SVXY remains unchanged, the put will fall in value by $4 each day). The decay of our short put is $13 (and will increase every day until next Friday). This means that all other things being equal, we should gain $9 in portfolio value every day at the beginning of the week and about double that amount later in the week.

Let’s talk a little about delta today. Delta is the measure of how much the option will increase in value if the underlying stock moves $1 higher. You can check out the delta value of a single option or your entire portfolio at any time. Puts have a negative delta value and calls have a positive value. If you have sold someone else an option, then your short position is positive if it is a put, or negative it is a call.

Most options traders like to maintain a delta-neutral portfolio condition. This means they don’t care if the stock goes up or down, at least for small changes. In our little SVXY strategy, we want to be a little bullish in our portfolio, so we are aiming for a net-delta-positive condition.

To repeat what we covered last week, since we are dealing in puts rather than calls, this is a little complicated. I hope you won’t give up. Delta for our Jan-15 90 put is minus 50. This means that if the stock goes up a dollar, our long put option will lose about $.50 ($50) in value. The weekly option that we have sold to someone else has a delta value of about 75 (since we sold it, it is a positive number). If the stock goes up by a dollar, this option will go down by about $.75 ($75) which will be a gain for us because we sold that to someone else.

Our net delta value in the portfolio is +25. If the stock goes up by a dollar, the portfolio should go up about $25 in value because of delta. (Unfortunately, this gets more confusing when you understand that delta values will be quite different once the stock has moved in either direction, but we will discuss that issue later).

If the stock behaves as we hope, and it goes up by about a dollar in a week, we will gain about $25 from the positive delta value, and about $100 from net theta (the difference between the slower-decaying option we own and the faster-decaying weekly option that we have sold to someone else.

Our goal is to generate some cash in our portfolio each week. This should be possible as long as the stock remains below $90. We will discuss what we need to do later if the stock moves higher than $90.

To update our progress to date, the balance in our account is now $1890 which shows a $390 gain over the 4 weeks we have held the positions. This is more than double the $45 average weekly gain we are shooting for to make our goal of 3% a week. We now have $744 in cash in the portfolio.

Next Friday we will make another similar trade and I will keep you posted on what we do.

]]>Today we will continue our discussion of both SVXY and the actual portfolio we are carrying out with only two positions. Every Friday, we will make a trade in this portfolio and tell you about it here.

Our goal is to earn an average gain of 3% a week in this portfolio after commissions.

I hope you find this ongoing demonstration to be a simple way to learn a whole lot about trading options.

Terry

**Ongoing SVXY Spread Strategy – Week 4**

Near the open today, SVXY was trading about $86. We want to sell a put that is about $1 in the money (i.e., at a strike one dollar higher than the current stock price). Our maximum gain each week will come if we are right, and the stock ends the week very close to the strike of our short put.

Here is the trade we placed today:

Buy to Close 1 SVXY Sep1-14 86.5 put (SVXY140905P86.5)

Sell to Open 1 SVXY Sep2-14 86.5 put (SVXY140912P86.5) for a credit limit of $1.15 (selling a calendar)

When we entered this order, the natural price (buying at the ask price and selling at the bid price) was $.85 and the mid-point price was $1.25. We placed a limit order at $1.15, a number which was $.05 below the mid-point price. (It executed at $1.16).

If it hadn’t executed after half an hour, we would have reduced the credit amount by $.10 (and continue doing this each half hour until we got an execution).

Each week, we will make a trade that puts cash in our account (in other words, each trade will be for a credit). Our goal is to accumulate enough cash in the portfolio between now and January 17, 2015 when our long put expires so that we have much more than the $1500 we started with. Our Jan-15 may still have some remaining value as well.

This is the 4th week of carrying out our little options portfolio using SVXY as the underlying. SVXY is constructed to move up or down in the opposite directions as changes in volatility of stock option prices (using VIX, the measure of option volatility for the S&P 500 tracking stock, SPY). SVXY is a derivative of a derivative of a derivative, so it is really, really complex. Right now, option prices are trading at historic lows, and lots of people believe that they will move higher. If they are right, SVXY will fall in value, but if option prices (i.e., volatility) don’t rise, SVXY will increase in value. In our demonstration portfolio, we are assuming that option prices will not rise dramatically and that SVXY will move higher, on average, about a dollar a week.

In this simple portfolio, we own an SVXY Jan-15 90 put. We will use this as collateral for selling a put each week in the weekly series that expires a week later than the current short put that we sold a week ago. Today’s value of our long put is about $14 ($1400) and decay of this put (theta) is $4 (this means that if SVXY remains unchanged, the put will fall in value by $4 each day). The decay of our short put is $13 (and will increase every day until next Friday). This means that all other things being equal, we should gain $9 in portfolio value every day at the beginning of the week and about double that amount later in the week.

Let’s bring a couple of other option terms into this conversation. First, we are bullish on the stock (we are betting that contango will continue to exist and provide more tailwinds for the stock than increasing volatility will hurt the stock). When you are bullish on a stock, you want to own a portfolio that is delta-positive. Delta is the measure of how much the option will increase in value if the underlying stock moves $1 higher.

Most options traders like to maintain a delta-neutral portfolio condition. This means they don’t care if the stock goes up or down, at least for small changes. We want to be a little bullish in our portfolio, so we are aiming for a net-delta-positive condition.

Since we are dealing in puts rather than calls, this is extremely complicated. I hope you won’t give up. Delta for our Jan-15 90 put is minus 50. This means that if the stock goes up a dollar, our long put option will lose about $.50 ($50) in value. The weekly option that we have sold to someone else has a delta value of about 75 (since we sold it, it is a positive number). If the stock goes up by a dollar, this option will go down by about $.75 ($75) which will be a gain for us because we sold that to someone else.

Our net delta value in the portfolio is +25. If the stock goes up by a dollar, the portfolio should go up about $25 in value because of delta. (Unfortunately, this gets more confusing when you understand that delta values will be quite different once the stock has moved in either direction, but we will discuss that issue later).

If the stock behaves as we hope, and it goes up by about a dollar in a week, we will gain about $25 from the positive delta value, and about $100 from net theta (the difference between the slower-decaying option we own and the faster-decaying weekly option that we have sold to someone else.

Our goal is to generate some cash in our portfolio each week. This should be possible as long as the stock remains below $90. We will discuss what we need to do later if the stock moves higher than $90.

We paid a commission of $2.50 for this trade, the special rate for Terry’s Tips customers at thinkorswim. The balance in our account is now $1730 which shows a $230 gain over the three weeks we have held the positions. This is much more than the $45 average weekly gain we are shooting for to make our goal of 3% a week. We now have $624 in cash in the portfolio.

Next Friday we will make another similar trade and I will keep you posted on what we do.

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Today, contango is about 6% (that is how much higher the futures are that this ETP is selling each day when it buys at the spot price of VIX). In rough terms, this means that SVXY should go up by 6% each month that VIX remains unchanged. This works out to be about $1.25 per week that SVXY should go up, all other things being equal (which, unfortunately, they usually aren’t).

I hope you find this ongoing demonstration to be a simple way to learn a whole lot about trading options.

Terry

**Ongoing Spread SVXY Strategy – Week 3**

In this simple portfolio, we own an SVXY Jan-15 90 put. We will use this as collateral for selling a put each week in the weekly series that expires a week later than the current short put that we sold a week ago. The decay of our long put (theta) is $4 (this means that if SVXY remains unchanged, the put will fall in value by $4 each day. The decay of our short put is $13 (and will increase every day until next Friday). This means that all other things being equal, we should gain $9 in portfolio value every day at the beginning of the week and about double that amount later in the week.

Each Friday we will have to make a decision as to which strike we should sell the following week’s put at. Our goal is two-fold – sell a put at a strike which is closest to being $1 in the money (i.e., the strike price is about $1 higher than the current price of the stock), and second, it must be sold at a credit so that we add cash to our portfolio each week.

This week, we were a little lucky because the stock is trading today at very near the strike of the 87 put we sold a week ago. We will buy this put back today and sell a put for next week at the 88 strike and collect cash in doing so. Here is the trade that we will place today. If it doesn’t execute after half an hour, we will reduce the credit amount by $.10 (and continue doing this each half hour until we get an execution).

Here is the trade we placed today:

Buy to Close 1 SVXY Aug5-14 86 put (SVXY140829P86)

Sell to Open 1 SVXY Sep1-14 86.5 put (SVXY140905P86.5) for a credit limit of $1.50 (selling a diagonal)

When we entered this order, the natural price (buying at the ask price and selling at the bid price) was $1.25 and the mid-point price was $1.55. We placed a limit order at $1.50, a number which was $.05 below the mid-point price. (It executed at $1.50).

Our goal is to generate some cash in our portfolio each week. This should be possible as long as the stock remains below $90 and we have to move that strike price higher. We will discuss what we need to do later when it becomes an issue.

We paid a commission of $2.50 for this trade, the special rate for Terry’s Tips customers at thinkorswim. The balance in our account is now $1670 which shows a $170 gain over the two weeks we have held the positions. This is much more than the $45 average weekly gain we are shooting for to make our goal of 3% a week.

Next Friday we will make another similar trade and I will keep you posted on what we do.

]]>Terry

**Ongoing Spread SVXY Strategy – Week 2**

Last week, we used the following trade to set up this portfolio:

Buy To Open 1 SVXY Jan-15 90 put (SVXY150117P90)

Sell To Open 1 SVXY Aug4-14 87 put (SVXY140822P87) for a debit limit of $12.20 (buying a diagonal)

This executed at this price (90 put bought for $15.02, 87 put sold for $2.82 at a time when SVXY was trading at $85.70.

Our goal is to generate some cash in our portfolio each week. This should be possible as long as the stock remains below $90 and we have to move that strike price higher. We will discuss what we need to do later when it becomes an issue. Right now, we are facing a market where the stock is trading lower than it was last week when we bought it. Now it is about $85, and our goal is to sell a weekly put each week that is about $1 in the money, and do it at a credit.

This is the order we placed (and was executed today):

Buy to close 1 SVXY Aug4-14 87 put (SVXY140822P87)

Sell To Open 1 SVXY Aug5-14 86 put (SVXY140829P86) for a credit limit of $ (selling a diagonal)

When we entered this order, the natural price (buying at the ask price and selling at the bid price) was $.65 and the mid-point price was $.90. We placed a limit order at $.85, a number which was $.05 below the mid-point price. It was executed at that limit price.

We paid a commission of $2.50 for this trade, the special rate for Terry’s Tips customers at thinkorswim. The balance in our account is now $1555 which shows a $55 gain (more than the $45 average weekly gain we are shooting for to make our goal of 3% a week).

Next Friday we will make another similar trade and I will keep you posted on what we do.

The stock has moved up a bit since we made this trade so you might be able to get a better price if you do this on your own.

This is what the risk profile graph looks like for our positions at next Friday’s expiration:

- SVXY Risk Profile Graph August 2014